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Winter Is Probably Coming Soon

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Re: Winter Is Probably Coming Soon

#41

Post by zxcvvcxz »

no_future wrote: post #19

Can somebody explain to me why every startup company(or at least every one that articles are written about) feels the need to raise as much VC as possible ASAP? There are so many options for developing scalable systems relatively easily and the cost of running an entirely web/software based company(read: 90% of the hot startups) today is comically low, especially with pay what you use PaaS/IaaS systems like those off…

>Can somebody explain to me why every startup company(or at least every one that articles are written about) feels the need to raise as much VC as possible ASAP?

>The only reason I would postulate for this trend is an increasing amount of non-technical founders who need to pay for developers to make and maintain their product, but don't want to give these developers significant equity in the company.

I think this is the best explanation. It's not just tougher to find engineers period, but you have to incentivize them away from the big co's who are paying like 120k/engineer. Equity helps, vision helps, but more than anything so does cash. However it is telling if companies need to rely primarily on cash to incentivize rather than the first two.

Maybe this could be a good litmus test for you as a founder: can you get your early engineers to work at half, or less, their market rate? If so, it implies you're putting something together worth working on (or you're really damn good at recruiting). But if not, if you have to pay close to their big co salary, then I think there's a problem.

Re: Winter Is Probably Coming Soon

#42

Post by zxcvvcxz »

mempko wrote: post #39
zxcvvcxz wrote: post #38

I think it's fair to say that this analysis applies better to web/app companies. There's just a fundamental problem with raising (and burning) millions trying to grow a site for inbound marketing, or an app for dating, or what have you, even though these are great ideas and things that people want: You likely won't be able to generate real revenue on something whose value is so immediately replicable or replaceable.…

Truth is, it is not their money. They are borrowing it at low rates. The most important point is that the private capital is fuelled by cheap public money. When that money dries up, so will the funding for the startup scene.

Could you explain to me the funding chain a little better? From what I understand, VCs raise money from "Limited Partners", but I never understood who those guys were and how they got their money. Pension funds and such?

Re: Winter Is Probably Coming Soon

#43

Post by Tyrannosaurs »

zxcvvcxz wrote: post #41
no_future wrote: post #19

Can somebody explain to me why every startup company(or at least every one that articles are written about) feels the need to raise as much VC as possible ASAP? There are so many options for developing scalable systems relatively easily and the cost of running an entirely web/software based company(read: 90% of the hot startups) today is comically low, especially with pay what you use PaaS/IaaS systems like those off…

>Can somebody explain to me why every startup company(or at least every one that articles are written about) feels the need to raise as much VC as possible ASAP? >The only reason I would postulate for this trend is an increasing amount of non-technical founders who need to pay for developers to make and maintain their product, but don't want to give these developers significant equity in the company. I think this is…

I think there are a couple of reasons why cash is a major motivator for start ups:

1) People understand the true value of equity which is to say in most cases, really not that much. As someone who was a non-vested dollar millionaire back in 1999 (and if you were working then who wasn't...), this time round I'm just far cannier about what that might be worth.

2) Big companies are getting wise to the vision thing. Maybe not the "put a dent in the universe" stuff, but the vision of what a company should be like and how it should work which is the stuff that impacts you day to day. Casual dress, flexible working, social activities... These aren't the exception any more, you can get them at large multinationals, you don't need to go to a start up for a nice working environment.

Re: Winter Is Probably Coming Soon

#44

Post by tanzam75 »

jiggy2011 wrote: post #35
sliverstorm wrote: post #17

Earlier quoted context omitted.

I used to think it was illegal under the anti-competitive regulations, but just based on proliferation of the strategy I'm not so sure anymore.

Dumping is usually only illegal for foreign companies to do. The government doesn't care about two domestic firms competing with each other, what they are worried about is the Chinese government using it's vast resources to subsidise the dumping of millions of almost-free tablet computers onto the US market and putting Apple out of business.

It is also illegal for a domestic company to price below cost, if that company is a monopoly. Under the anti-trust laws, this is known as abusive pricing.

However, it is legal for a non-monopoly to price below cost. The assumption is that this behavior is self-regulating, because the company will eventually go out of business if it can't make a profit.

If otherwise-viable competitors are driven out of business in the meantime, that's simply collateral damage. The current thinking about antitrust laws is that they should protect competition, not competitors. Eventually, new companies will spring from the nuclear wasteland. (Google Reader and RSS comes to mind.)

Re: Winter Is Probably Coming Soon

#45

Post by colinbartlett »

zxcvvcxz wrote: post #42
mempko wrote: post #39

Earlier quoted context omitted.

Truth is, it is not their money. They are borrowing it at low rates. The most important point is that the private capital is fuelled by cheap public money. When that money dries up, so will the funding for the startup scene.

Could you explain to me the funding chain a little better? From what I understand, VCs raise money from "Limited Partners", but I never understood who those guys were and how they got their money. Pension funds and such?

You got it: Pension funds, endowments, foundations, union retirements funds, rich families, anybody who has a lot of money and wants to diversify into a high-risk, high-return fund.

They basically trust smart people, who have presumably succeeded at this in the past, to pick more net winners than losers and earn a return on their money.

Re: Winter Is Probably Coming Soon

#46

Post by dasil003 »

Of course a VC does not want you wasting his money and will finger wag all day long to try to make entrepreneurs behave.

However his analysis focusing on isolated economic indicators is missing the forest for the trees (presumably willfully). Why is money cheap? Because investors have no place to put their money. The accelerating consolidation of wealth within the super rich (ie. the 0.01% funding VCs) and the pathetic amount of tax and philanthropy mean they have nowhere to put their money. It is going to be impossible to get the returns they demand because of the decimation of the middle class and on a larger scale the impossibility of sustaining 20th century level growth over the long term.

Tech is a long way from being an unattractive investment because it still provides the best avenue to scaling a business quickly. It will survive a tremendous amount of douchebag entrepreneur cash burning simply because there's no better game out there, and until society comes to term with what's actually happening economically rather than wishfully believing the juked stats the government puts out to get re-elected I don't see any better investment opportunities coming along.

Let the party continue...

Re: Winter Is Probably Coming Soon

#47

Post by KonoHito »

Any evidence the party is coming to an end?

Actually for me it is getting a bit ridiculous when an app like Yo can get like a million dollars when it goes viral without anyone actually figuring out what's so great about it.

It does seem like growth is triumphing over other metrics, like revenue, or common sense. Of course if we go by that measure, companies like facebook will never survive at all, not sure how this is gonna play out.

Re: Winter Is Probably Coming Soon

#48

Post by Bahamut »

zxcvvcxz wrote: post #41
no_future wrote: post #19

Can somebody explain to me why every startup company(or at least every one that articles are written about) feels the need to raise as much VC as possible ASAP? There are so many options for developing scalable systems relatively easily and the cost of running an entirely web/software based company(read: 90% of the hot startups) today is comically low, especially with pay what you use PaaS/IaaS systems like those off…

>Can somebody explain to me why every startup company(or at least every one that articles are written about) feels the need to raise as much VC as possible ASAP? >The only reason I would postulate for this trend is an increasing amount of non-technical founders who need to pay for developers to make and maintain their product, but don't want to give these developers significant equity in the company. I think this is…

If you want the really good engineers from those companies, they're often making more than $120k - they can be making up to $160k.

Speaking as an engineer who has already been pitched at by others working on startups due to my formidable scalable productivity in my domain (while only being in the Bay area for 4 months), I prefer the security of a good salary and a good amount of stock. It would be very hard to convince me to leave without offering some level of immediate financial security.

Note: I work at a startup that raised a Series A round - I was offered $140k + signing bonus & generous stock options. I believe the company has been very happy with my results so far.

Re: Winter Is Probably Coming Soon

#49

Post by chippy »

Bahamut wrote: post #48
zxcvvcxz wrote: post #41

Earlier quoted context omitted.

>Can somebody explain to me why every startup company(or at least every one that articles are written about) feels the need to raise as much VC as possible ASAP? >The only reason I would postulate for this trend is an increasing amount of non-technical founders who need to pay for developers to make and maintain their product, but don't want to give these developers significant equity in the company. I think this is…

If you want the really good engineers from those companies, they're often making more than $120k - they can be making up to $160k. Speaking as an engineer who has already been pitched at by others working on startups due to my formidable scalable productivity in my domain (while only being in the Bay area for 4 months), I prefer the security of a good salary and a good amount of stock. It would be very hard to convin…

So you didn't accept it for the vision, because it was something worth working on, but for the money? Or maybe a combination?

Re: Winter Is Probably Coming Soon

#50

Post by vrama »

venus wrote: post #7

I hope so. Currently, VC money is a horrible market distortion that encourages what is basically dumping - companies with good products and actual business models being starved of oxygen by cashed-up competitors who simply give products away for free. I'm not even sure of the economic term for it but wouldn't be surprised if it's illegal in a few years, after we've gotten more sophisticated.

Well said. One of my friend's bootstrapped HW startup got a big hit because a VC funded competitor is dumping thier products at 1/4th of the cost to make. That product costs approximately 35-40$ to make. But you can buy it for 10$ from amazon. It happens in many market segments.
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